SuRo Capital has total return opportunity, PepsiCo has risks

As part of today's Good Buy or Goodbye, Tematica Research chief investment officer, Chris Versace, names his "good buy" pick, SuRo Capital (SSSS), and the name he's saying "goodbye" to, PepsiCo (PEP).

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Video Transcript

00:00 Josh Lipton

It's a big, noisy universe of stocks out there. Welcome to good buy or good bye. Our goal to help cut through that noise to navigate the best moves for your portfolio and I'm here with Chris Versace, Thematic Research Chief Investment Officer. Chris, let's get to some picks here. Your first one, you're bullish on a name is Suro Capital. And this one has been, it's had a heck of a run already, Chris, about 40% this year. It's up about 100% over the past 12 months. We're going to go through the reasons you say it's still a buy here. The first one, portfolio positions. Walk us through what you mean there.

00:41 Chris Versace

So, let's talk about what Suro is, right? It's a business development company that invests in private companies. So the opportunity here is to capture these faster growing companies and cash in when the company monetizes those positions. So what are some of these big positions? You're going to know them, Josh, Service Titan. Nice IPO earlier this year. Core weave, which has been a monster IPO. We do have some others in their portfolio that could go public in the coming quarters. Hence my, you know, comment earlier about the IPO market. So think of um, liquid death. Think of plaid and another holding today uh is apparently uh looking for bankers, that's lime. So when we think about a BDC company that invests in private companies, when they sell their positions, what do they have to do? They have to pay dividends. And that brings us to the second point, which is total return. So you're saying that Suro capital shares, they're up big, capital appreciation, no question. But now, as these IPO lockups come and pass, Suro has to exit these positions and what do they have to do? Pay those out in dividends. So I think that between Service Titan that just had their first IPO lockup, June 14th, Coreweave coming in September, we're going to start to see a cadence of dividend payments and potentially even a special dividend payment at the end of the year. Again, they have to true up at least 90% of their income has to be paid out. So I would argue total return, Josh, that's the way to think about this name and we haven't seen that dividend stream yet. It's coming.

03:23 Josh Lipton

Let's get to the third point. Why this one's a buy?

03:27 Chris Versace

That's it. Right there. The IPO lockup expirations. You know, Service Titan already happened. Coreweave, like I said, is coming. And then as more of their portfolio companies go public, we want to time and watch these IPO lockup expirations because we'll see the continuation of this dividend stream and this total return narrative.

03:57 Josh Lipton

Now, before viewers all pile in, Chris, the natural question to ask is what's the downside risk I got to think about?

04:08 Chris Versace

So, is this a, you know, mega cap name? No, it's a small cap name. So you have to be a little careful, right? The audience for small caps is smaller than for mid caps or larger cap stocks. So be mindful of that. Trading volume is the next one. At about 195,000, you know, shares average daily trading volume over three months. It's not the most liquid. So you've got to pick your spots. Sometimes when we see uh headlines with the stock, it can pop. You might want to let it cool off a little bit and then build your position over time. And then finally, the ongoing portfolio section. I've been talking about the existing portfolio today and the path to monetization. But ultimately, for this stock to continue to work 18 months, two years, three years from now, management has to continue to find these gems, right? These very small, growing, thriving private companies today, next year, that will be monetized one year, two year, three years down the line.

05:31 Josh Lipton

All right, so we know what you like. Let's talk about what you don't like, Chris. One, you say, listen, you'd sell this one. That would be PepsiCo, right? Let's go through the reasons there. The first reason you would argue, selective spending among consumers.

05:50 Chris Versace

Yeah, there's, I mean, if you take a look at what we've seen with consumer spending, it is kind of uh pulling back. Consumers are being, as we said, increasingly selective. To me, the issue with that is if you're a company like PepsiCo that's getting challenged from Coke, that's getting challenged from Utts and other brands, you might have to be a little more promotional. That those promotional activities eat into margins.

06:32 Josh Lipton

Second reason you would avoid this one. Margin headwinds.

06:37 Chris Versace

Yeah, well, right, so there's two parts to that. One I just mentioned, which is what they have to do to entice people to spend. But the other side is, you know, tariffs, input costs that are also putting margin pressure on PepsiCo. So when I see multiple margin pressures, that's not a good sign, Josh.

07:02 Josh Lipton

Third one, you say avoid it because of risk EPS missing continuing.

07:08 Chris Versace

Right. So typically, PepsiCo is one, has been one of those companies that they kind of, you know, squeak out an earnings beat, right? By a penny or two, something like that. But the most recent quarter for March, they actually missed by a couple pennies. Now, that caught my eye, but if you put together the margin comments that I'm talking about, it's likely that their margin pressure will develop in the second half of the year, pressuring their EPS. I see greater downside risk and earnings than I do in upside surprises.

07:52 Josh Lipton

Before you throw in the towel, finally, what's the upside risk to this one?

08:00 Chris Versace

So, when we think about the margin pressures where they're coming from, you know, one of them is the promotional activity. So if that falls by the wayside, I don't see it happening near term. That could be a catalyst for the shares, but also given the nature of its business, food, beverages, we have to track commodity prices. We're talking potatoes in particular uh with lays, but also rice, wheat, corn, and sugar. And if we see those, you know, turn favorable, meaning year-over-year declines, that could be a nice tailwind for margins.

08:44 Josh Lipton

Um, let me ask you this. Promotional environment reverses. That's another one. Some might look at this stock though, Chris, and they say this thing has not been working. It's already in the red this year and over the past 12 months. But I guess your, your fundamental point is you're not all the bad news is priced in.

09:11 Chris Versace

Correct. You know, just because it's fallen doesn't mean that there's not more room to go and I think that's the case. You know, conceptually, you know, we're coming up to a very important time for the market, which is going to be the June quarter earnings season. Companies will give guidance, or in some cases reset guidance for the second half of the year. And there are arguably some unknowns, including tariffs, uh which, you know, if you're a company and you're sitting there and you're saying, well, the EU tariff deadline is likely to get pushed. China, the timeline on that, maybe August. So you're going to be giving guidance with some unknowns. Another reason to think guidance could skew conservatively.

09:59 Josh Lipton

Good points. All right, so buy Suro, sell PepsiCo. Related Videos

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